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What has driven the performance in FY08?

Topline registered a 20% YoY growth in FY08, while expenditure grew 20%. Bottom line grew by 29% YoY in FY08, excluding the exceptional item of stake sale in Reliance Petroleum and adjusted for tax. On a consolidated basis, the increase in revenue in FY08 was due to 12% increase in realisations and a 6% growth in volumes. Consumption of raw materials increased by 17% YoY in FY08 on a consolidated basis on account of higher crude and naphtha prices.

Cost break-up

(Rs m)

4QFY07

4QFY08

Change

FY07

FY08

Change

Raw materials

191,270

280,980

46.9%

780,380

981,790

25.8%

% sales

69.7%

75.4%

69.9%

73.6%

Staff cost

5,410

5,760

6.5%

20,940

21,190

1.2%

% sales

2.0%

1.5%

1.9%

1.6%

Other expenditure

26,130

25,930

-0.8%

115,150

98,390

-14.6%

% sales

9.5%

7.0%

10.3%

7.4%

Total cost

222,810

312,670

40.3%

916,470

1,101,370

20.2%

% sales

81.2%

83.9%

82.1%

82.5%

During FY08, the refining segment EBIT recorded a 34% increase. This can be explained by the improvement in margins from 9% in FY07 to over 10% in FY08 as well as a refinery utilisation rate of over 96% in FY08. The refinery achieved a throughput of 32 m tonnes of crude during the year. The company exported 67% of its production in FY08. Exports have registered a 25%YoY growth during the year. However, the growth in refining EBIT has slowed down recently as can be seen in the 9% growth achieved on a QoQ basis in 4QFY08.

Refining Segment

(Rs m)

FY07

FY08

Change

Revenues

859,320

1,007,430

17.2%

EBIT

77,240

103,320

33.8%

EBIT margin

9.0%

10.3%

(Rs m)

4QFY07

4QFY08

Change

Revenues

210,250

286,860

36.4%

EBIT

22,750

28,390

24.8%

EBIT margin

10.8%

9.9%

(Rs m)

3QFY08

4QFY08

Change

Revenues

261,540

286,860

9.7%

EBIT

26,140

28,390

8.6%

EBIT margin

10.0%

9.9%

RILís refining margins were US $ 15/bbl in FY08, up from US $ 11.7/bbl in FY07. Margins peaked in 2QFY08 due to high light product cracks and tightened product markets but dropped thereafter due to increased crude prices and reduced cracks.

The petrochemicals segment registered a 5% YoY growth in FY08 at the revenue level. Higher realisations accounted for 2% of the sales growth while higher volumes accounted for the balance 3%. It benefited from the strong demand from downstream user segment, higher production and firm prices across the value chain. The segment grew 8% at the EBIT level. High feedstock prices impacted the petrochemicals business in 3QFY08 and 4QFY08.

Production ('000 tons)

FY07

FY08

Change

Production

18,669

19,647

5.2%

Polymers

3,214

3,374

5.0%

Polyester

1,482

1,572

6.1%

Polyester intermediates

4,335

4,714

8.7%

Results (Rs m)

FY07

FY08

Change

Revenues

503,710

530,000

5.2%

EBIT

65,780

71,130

8.1%

EBIT margin

13.1%

13.4%

85% of RILís debt is foreign currency denominated. During FY08, the rupee appreciated by 7.7% against the US dollar. As a result, Interest costs were lower by 9.4% in FY08 on account of appreciation of the rupee vis-ŗ-vis the US dollar.

During the year, RIL incurred capital expenditure of Rs. 195 bn. The capital expenditure was largely for the upstream oil and gas business.

Capex

Particular (Rs m)

FY07

FY08

E & P

57,250

134,430

Refining & Marketing

14,300

26,610

Petrochemicals

4620

5060

Common

13,630

28,930

What to expect?

RILís refining segment is expected to deliver robust GRMs going forward, on the back of superior product mix and complex refinery configuration. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region. However with lower per capita consumption in the domestic markets coupled with a booming economy, higher volumes are going to propel the petrochemical EBIT.

RILís investments in E&P, organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint to Kurdistan, Oman, Yemen and Columbia. There exists immense potential regarding further upside to the companyís current reserves. However, lack of clarity regarding the size of potential reserves along with issue in commercialisation of the large-scale CBM blocks make valuations difficult.

At the current price of Rs 2,635 the stock is trading at a multiple of 25 times its FY08 earnings, excluding exceptional item. RILís share price has registered gains on the back of positive news flows in the new ventures. However, the value of the current business seems to be fairly factored into the valuation. Thus, we believe focus has now significantly shifted to execution of the new ventures. RIL has a proven track record and superior execution capabilities. However, the nature of the execution risk in the new ventures is different from what the company has faced in the past.

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